My Lords, in the short time available to speak I want to confine myself to three issues, and I take as my text for the first two Mervyn King's comment to the Treasury Select Committee on
"the single most pressing challenge ... is to get the banking system lending in any normal sense".
In other words, and here I follow the comments of my noble friend Lord Wakeham, the shortage of bank lending is now one of the most important problems we face. Indeed, the governor seems to think that it is the most important problem facing the economy. Three days later the CBI reported that some 40 per cent of firms have had their credit facilities reduced or withdrawn. Everything I hear in business and financial circles confirms this, and here I confirm my interest as recorded in the Register as a member of the supervisory board of DAF Trucks and chairman of the pension funds. Let me say also in passing that the reduction in VAT at a cost over two years of £12.5 billion, when prices are coming down by often more than that, seems a very poorly directed public financial decision.
My first point concerns small and medium-sized enterprises. The Government have announced a new small business finance scheme to support up to £1 billion-worth of bank lending. The Secretary of State—the noble Lord, Lord Mandelson—and the noble Lord, Lord Bilimoria, cited the recent survey undertaken by the Federation of Small Businesses, which I have with me. Two points that were not mentioned are that when small businesses were asked how they felt about the financial prospects of their businesses following the Pre-Budget Report, 58 per cent were significantly or somewhat less optimistic compared with only 6 per cent that were optimistic. Further, in response to being asked whether they had seen an increase in the cost of existing finances in the past two months, 30 per cent said yes, and I am told that the percentage increases with every new survey. In response to being asked whether they have seen an increase in the overall cost of new credit in the past two months, again 30 per cent said yes.
I was the Minister for small business in 1981 who introduced the loan guarantee scheme, and I was delighted to learn from many small businesses subsequently that it had helped them to get off the ground. We have garnered much experience over the years on how to build on and extend that type of scheme in the current crisis. The Federation of Small Businesses has put forward its proposals and discussed them with the Government and the major banks, but I understand that it is not likely that the new small business finance scheme will be implemented until the end of the January. My first point is this: is there any good reason why the scheme could not be introduced at the latest by
My second point concerns large and medium-sized major corporates—that is, those not classified as SMEs. I want to elaborate on the point made briefly by the noble Lord, Lord Oakeshott. So far everything has been concentrated on, and until recently most media comments have been on, homeowners and SMEs. Little mention has been made of the need to focus on the problems of large companies, on which smaller companies so frequently depend, and of the potentially huge unemployment consequences from that sector. Everything I hear confirms that where facilities even for the most highly rated and creditworthy companies are being renewed, it is often at much higher margins over LIBOR and with substantial fees up front. Where new facilities are sought, again even from highly creditworthy companies, the margins and fees are also much higher, if they can be offered at all. Many banks are simply saying that they will not provide them. However critical one may be of the previous mismanagement and errors of the banks, one has to recognise that they are taking commercial decisions as they see them to improve their margins and strengthen their balance sheets. I am told that most banks are looking at the end of the year and trying to get them into the best possible shape. Does that lead to the suggestion that the situation might be a lot better after the end of the year? I suspect not.
I am not sure that the call of the Prime Minister, the Chancellor and others for lending rates to follow down to base rate will have much effect. Indeed, when setting out the principles for the UKFI, the new company set up to manage the Government's investments in the banks, the Chancellor said that one of them would be to respect the commercial decisions of the financial institutions. Therefore, I follow the noble Lord, Lord Razzall, in saying that I would be interested to hear how the Minister will deal with this major challenge. So far, it ain't working.
One suggestion put to me, and one I believe that the car manufacturers hinted at during their recent meeting with the Secretary of State, is something I raised in the last debate we had on these issues. I mentioned the possibility of introducing a commercial paper funding facility similar to that which the Federal Reserve Bank of New York introduced in the US at the end of October, purchasing highly rated US dollar three-month unsecured and asset-backed commercial paper via eligible primary dealers. In the letter which the noble Baroness, Lady Vadera, sent today to my noble friend Lady Noakes, she said,
"in the UK the approach to date has been to tackle the current problems by taking action on bank solvency ... As part of this we have introduced a Credit Guarantee Scheme to facilitate lending to banks. The Scheme assists banks to issue new debt including commercial paper by providing assurance to investors, so in some aspect it is not dissimilar to the CPFF".
My response to that is, first, that the Federal Reserve already had in place facilities similar to the Government's credit guarantee scheme but found it necessary to introduce the new one subsequently. Secondly, although by no means a bank replacement for the credit guarantee scheme, it would add to it by enabling companies, as distinct from bank lending, to take advantage of it. It would help to free up more bank lending and thus, for appropriate companies, make a contribution to what the governor has called the country's most pressing problem.
My final point refers to savers and the pension funds. We have heard a great deal about the plight of borrowers but the other side of the coin, which is now being noticed, is the plight of savings and, not least, its effect on pensioners. When the savings ratio is at an all time low, it discourages savers even more. It is ironic to hear some critics saying, "If only the banks and building societies would lend more of their money", when it is, of course, their savers' moneys that they are lending, They need to keep attracting savings, and that is another reason why the banks will not simply come down to base rate. Many pensioners with modest lifetime savings are very worried about making ends meet. Ultimately, it is a question of balance. We should learn from Japan the lessons of a decade of nil or almost nil interest rates and that other side of the coin needs to be expressed.
We have spoken endlessly in this House about the decline of pension funds and the part-government responsibility for that. We are now coming into a new danger in that, with the drop in asset values, many pension funds will have a deficit much larger than at the 2007 valuation or even their valuation today. I hope the regulator, as I think he has already indicated, will be sensible and cautious about putting too many pressures on pension funds to deal with a short-term problem in regard to deficit recovery plans, which would make the long-term issues for pension funds even worse.